Every time I check the Diageo (LSE: DGE) share price, I need a stiff drink. I thought I was buying a bargain, when I bought the FTSE 100 spirits giant weeks after it had been slammed by a profit warning in November 2023.
That warning was triggered by a slump in Latin America, where hard-up drinkers downgraded to cheaper brands, and stocking issues emerged.
Since then, the problems have piled up. Sales have dropped, its premium brands strategy has misfired, and the cost-of-living crisis has hurt consumers. The shares are now down 30% in a year and 50% over three.
I can usually take that sort of thing on the chin. Investing means accepting the shocks along with the successes, and over time my individual stock picks have easily beaten the FTSE 100. Still, it’s frustrating when an apparently solid blue-chip like Diageo turns sour.
Also, I have two long-term concerns. Younger people are drinking less, while new weight-loss drugs could shrink alcohol demand. Does the investment case for Diageo still hold?
I don’t think people will ever stop drinking entirely. Alcohol’s been part of life for millennia, but it’s still a worry. Even so, I’ve never seriously thought about selling. That’s partly because I’m down about 36%, and reluctant to lock in that loss. But only partly.
FTSE 100 underperformer
Latest full-year results, published on 5 August, showed Diageo generating an impressive $2.74bn of free cash, but operating profit fell 27.8% to $4.33bn and net profit plunged 39.1% to $2.53bn.
Analysts at Goldman Sachs upgraded Diageo on 8 August, saying today’s valuation looks more supportive, but only from Sell to Neutral. Hardly a ringing endorsement.
The shares trade on a price-to-earnings ratio of around 14.7, which looks fair for a business with Diageo’s global reach and brand strength.
Growth and income potential
Forecasts bring more cheer. Conensus analysts forecasts suggest the shares will hit 2,316p within a year, more than 30% higher on today. Add in a yield near 4.5%, and the total return could hit about 35%, if forecasts prove accurate. We’ll see.
Diageo’s cost savings and margin plans could add further support. It still has one of the strongest balance sheets in the drinks industry, with reliable cash generation and the scope to invest and drive a recovery.
Of course, there are risks. Growth’s stalled in key regions, and management has withdrawn its medium-term target. Shifts in consumer behaviour and US tariffs on whisky or tequila could hurt sales. Turning round a struggling company isn’t an overnight job, it often demands a big reset and I don’t think we’ve had it yet.
Holding for the long term
Diageo may have driven me to drink, but I’m sticking around, hoping it will give me something to celebrate one day. I may have to be patient though. I think it’s worth considering buying, but only for investors who understand the risks and take a long-term view. They might also need to keep a bottle of something strong handy.
